Question
3. John Deere, the manufacturer of agricultural machines and equipment, expects earnings per share in the coming year of $4.40 and dividends per share of
3.
John Deere, the manufacturer of agricultural machines and equipment, expects earnings per share in the coming year of $4.40
and dividends per share of $2.4. Its earnings are expected to grow 26% over the next 5 years, but the growth rate is expected to
decline each year after that to a stable growth rate of 4% ten years from now. The payout ratio is expected to remain
unchanged over the next 5 years, after which it would increase each year to reach 60% in steady state. The stock is expected to
have a beta of 0.86 until Year 5, after which the beta would reach 0.95 by the time the firm becomes stable. (The treasury bond
rate is currently 2.85% and is expected to increase to 5% by year 10. Market risk premium is 6%). Assuming that the growth rate
declines linearly (and the payout ratio increases linearly) in the transition period, estimate the intrinsic value of the stock.
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